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interest

If there is one topic that investors get passionate about, then it’s returns. Looking at the current economic climate, then P2P returns are clearly quite good, but the somewhat downwards trend you can see happening is clearly causing dismay among investors.

Way back when, when I started investing in Bondora, it was completely possible to get 20% returns yearly due to the fact that the market was both new (therefor high risk), and pricing was vague at best (due to lack of precise credit models). However, in the recent few years the industry has clearly evolved to be more mature and less inefficient, bringing to investors loans with buy-back guarantees, which at times might have left beginners the impression that there isn’t much inherent risk left anymore when it comes to investing into P2P (which is clearly not the case).

The two favourites of the recent year or so have clearly been the two Latvian portals – Mintos and Twino, which offered large loan volumes with buy-back guarantees. For a while the interest rates were high enough that many people were a bit confused as to why the rates were that high, and were sure that the rates would be dropping in the near future.

It seems that we are somewhat starting to reach the point where returns will not be as high as they were anymore, and this is of course both good and bad – for investors who enjoy higher risks, the reduced returns are of course bothersome, for more conservative investors the lowered level of risk will of course be more appealing.

Twino

Twino has already gone through one attempt to reduce the interest rates, which caused significant uproar among investors. They attempted to drop the interest rates to 10%, which caused investors to reduce their investments, which made them increase the rates once more, but they are still not back to the point where they started at (they used to be 12,9% & 14,9%; however now are 10-12% & 13% respectively.)

This means that while it’s still possible to generate >10% returns, then looking at the loan volumes they process the question arises – for how long? Since Twino is closing in on 10 million loans funded per month, then clearly there is enough investor money to go around, meaning when the higher interest loans run out, then the lower interest loans will get funded as well. Once enough get funded regularly, it would be reasonable to expect a drop in the rates.

Interestingly enough, a lot of investors in Twino seems to be super cautious about the longer term loans (24 months), which in my opinion seems a bit unfounded – largely because 1) they are resellable 2) a large amount of them get bought back early, meaning it’s not such a big commitment.

Now, with Mintos, the dynamic for the rates is a bit more complicated since different loan originators balance the interest rates between what they themselves believe to be fair and what the other originators are offering. This so far has caused a sort of a hierarchy to form between the different originators, meaning some loans disappear from the market very quickly (or get marked full by autobidders) while some remain “waiting” on the primary market.

While there have been fluctuations here and there between the interest rates offered, then it’s clear to see that the amount of loans with a buyback guarantee has been slowly but surely decreasing, meaning that investors are forced to do some more in depth analysis to figure out whether or not they should include lower rate buy-back loans or higher rate ordinary loans, which is rather complicated to do due to the lack of public information about the loan books of the originators.

Future of returns

Twino and Mintos do not exist in a vacuum – the amount of investor money available is dependent on the amount of projects listed on alternative sites and the returns offered there. However, if you look at the average returns offered by other portals, then >12% returns will be more and more unlikely as time goes on.

Just looking at the Estonian portals available, then Estateguru historical returns are <11%, for Bondora they have said they wish to hit 10% returns, for Investly the returns are <9%. Higher returns are offered by P2P portals which include more risk or a more complex model (Crowdestate for example inherently has much more risk, Omaraha’s premium for returns makes sense if you consider the fact that they have no proper exit mechanism available and the learning curve is rather steep).

It’s of course difficult to make predictions about the future, and how the markets behave, but I do believe that we are likely to be hitting the downwards slope of returns, which will in the long run bring us closer together to US/UK/Central European returns for P2P portals.

On the one hand this means a bigger faith by investors (investing their money at a lower rate), and a reduced risk rate (due to growth of the whole sector), on the other hand this will signify lower returns, and higher efficiency on the markets, meaning the >20% returns several investors have achieved are likely to be in the past. As someone who does believe that the effort/risk vs returns have been off balance so far, the returns lowering a bit is not an unexpected development.

Omaraha is a small Estonian P2P lending site, that I added to my company P2P portfolio. Out of all the other portals in my portfolio at the moment, this is the least international and smallest in terms of volume – they focus heavily on Estonian loans and do not have aggressive expansion plans, making it difficult to create a truly large portfolio there. However, they have been a nice addition to my portfolio and I think I’ve gotten into the groove of how things work there in the last 6 months.

Investment logic

By far, Omaraha has the most complicated auto-bidding system of any P2P site that I have used. The borrowers get assigned a credit group between 600-1000 and you can assign individual interest rates to all credit groups if you wish to do so. However, when assigning the interest rates you must take into account that Omaraha has a different profit model than other sites – they take 20% of the interest earned from the loans for themselves, so if you assign a 25% total interest rate, then only 20% is your part of it.

To make it even more complicated, they have two additional quirks added to their bidding system. Firstly there is something called a bonus, which essentially is you voluntarily giving away a bit more of your interest earned into the buyback fund with the purpose of getting ahead in the auto-bidder waiting queue. This means that you can either accept a lower interest rate or set up a higher interest rate, but agree to give a percentage of that away.

The much more problematic part of auto-bidding is the fact that Omaraha functions as a black box when it comes to giving out any information about what the interest rate averages are when it comes to different loan groups. This means that you’re taking a stab in the dark when trying to guess what to set the interest rates at.

Firstly, this means that you need to find someone who has invested there for a while to get some reasonable info about interest rates or you just set up your bidders and then come down one percentage point at a time to see at which point the money starts going out. As there is different amounts of borrower demand throughout the month, then the interest rates may float throughout the month as well by a couple of percentage points.

This means that maximising profits is rather difficult unless you wish to spend a large amount of time trying to fine tune your interest rates. I’ve made peace with not being able to squeeze more out of the system, though I know it is possible from several investors who have told me that they spend more time tinkering with the numbers.

Usability logic

There are two key things you must keep in mind if you want to invest in Omaraha. Due to them being so small and not wanting to develop the portal too much, there is no secondary market. This means that you are unable to make a quick exit through selling your investments. From what has been said from the forums, an exit can be done with you taking out a low interest loan to get your money out, but this still carries interest, meaning you will be taking a loss if you want to exit early. Therefore you should consider this one of the longest term investments in an average P2P portfolio.

Something that makes the investment length a bit shorter is the fact that Omaraha uses a buyback system. Their system works as a partial principal buyback, meaning if a loan defaults then they buy it back at 80% remaining principal value. It’s definitely not as generous as Twino or Mintos with their 100% principal buybacks, but Omaraha also offers a higher interest rate which compensates for that.

The issue for those who invest into P2P via their company, is the lack of proper reports. The screenshot you see below is literally the only reasonable report you can get from the site when it comes to your investments. As for myself, I take a screenshot of the investment status every month, and this is what my accountant uses as the base document for bookkeeping. Not ideal by far, but not seeing any changes there in the future.

Overall, I’d say I like their system, they offer competitive interest rates and the ability to invest into Estonian loans only. There is also a large amount of tinkering you can do, however I feel at this point it’s reasonable to just try to keep the investments going steadily instead of fine tuning it and wasting too much time. The lack of exit options is problematic, but this is also why I am limiting the portion of my investments that I put into Omaraha.

Honestly, so many things were happening in P2P in Estonia in March that it was difficult to keep track of everything. Overall, big numbers, some chaos and interesting future perspectives would probably describe the month. Overall, I just got back from London and it was an experience in how far behind we are when it comes to investing being mainstream – you can hardly look anywhere in central London (or on the metro) and not see some sort of advertising for investing. Things are hopefully changing here as well, though.

Bondora personal portfolio

I’ve started the process of wrapping up my private portfolio, which can be seen from the dip in interest earned (below 100€ for the first time in 6 months). What this means is that I am selling off defaults and old mispriced loans, that I want to get rid of. Current plan is to sell off the not-so-great parts of my portfolio within this year, and then do a sale for the better loans next January (so the tax obligation would arrive mid-2018).

Overall I think it’s a reasonable plan because 1) secondary market is so slow at the moment that I don’t want to dedicate too much of my time to selling things 2) selling good EST loans at a premium won’t be an issue, so I might as well let them pay as they are, and then sell the ones that are too far from deadline once I actively pull out. I’ve transferred out 1K of money, which is going into stocks since it’s money invested as a private person.

Bondora business portfolio

For my business portfolio, I am a bit torn. Bondora is not the highest returning part of my P2P portfolio (Omaraha is), however Omaraha is unable to offer enough volume and lacks a secondary market. So it seems that Bondora will have to remain the biggest part of my portfolio at this point. There was a slight dip in interest returns since last month a lot of the loans started with frontloaded interest payments, it should stabilize out and start climbing now.

Omaraha portfolio

As time goes on, I have to admit, I am liking Omaraha more and more. It is clearly currently top when it comes to returns, since I haven’t had any defaults yet. However, they recently announced that all new defaults will have a buyback at 80% of principal value, which means that the potential loss isn’t immense – especially since most of my loans (90%) are 900+ (the highest) credit group. Looking rather stable, and aiming to get to 100/month in interest earned by some time in autumn. Will see, depending on how I manage the different proportions – adding money to Omaraha is heavily dependent on their volume of loans. I mostly just add money when what I have on the account has run out.

Mintos, Twino, Viventor

I’ve essentially given up with my idea that Mintos could offer reasonable short-length loans and slightly replayed the proportions between Twino and Mintos. Of course, Twino has been slightly confusing this month, the biggest problem being that the autobidder is slightly broken at the moment. Viventor finally managed to get theirs working though, so there must be balance in the universe 😉

Currently Twino/Mintos stand equal in my portfolio (just added the money into Mintos later, which is why the interest returns lag). For Viventor, they seem to be doing OK, so I will probably add in a couple of hundred extra there just for their 1-month length loans. Mintos’s offers of 13% consumer loans and 13,5% car loans means that even though I’m not a fan of the loan lengths there, it does slightly pull ahead in the race of the Latvian platforms at the moment.

Crowdestate

I have this dream, that one day CrowdEstate’s IT system will work as intended. At this point it seems like they are still suffering from issues when a new project releases, which made this project fun – since I was in London I had to find a Starbucks for wifi and then suffer through the horror of using their website on my mobile phone. I really want them to do well, but issues like this take away a lot of goodwill that investors would otherwise have.

Estateguru, Moneyzen & Investly

Estateguru is impressing with volumes, however as stated before, not adding any money currently since my portfolio there is private (no word of a secondary market for a long time now).

Moneyzen did not manage to get the new regulatory license on time, which means that no new loans are being given out. Which makes me reasonably happy that I ‘only’ have 500€ there, but it’s not being reinvested, so not good overall.

Investly seems to have gotten their pipeline for factoring (invoice selling) going, there seems to be a reasonable amount of invoices listed, which is making me consider actually finalizing my registration and testing them out.

Loans having buyback has caused interesting moves on the P2P market. Many investors flocked to the idea of having more guarantees, with rather solid returns – it was possible to earn 13-15% annualized with buyback guaranteed loans. However, the interest rates of loans have come down and I’ve witnessed several discussions on how the lower interest rates are not good enough anymore.

Twino announced that they are reducing interest across the board to 10% per annum to align better with the corporate interests. Mintos interest rates have also been slowly coming down on many of the buyback guaranteed loans and is starting to average closer and closer to 10%. So, is a 10% return too low?

Comparing returns & risk to other investments

If you look at the current state of what’s happening on the markets, then 10% in comparison to that is a rather reasonable number. Stock markets are not doing particularly great, and short term reaching such returns without taking significant risk is rather impossible. Looking at real estate, you can get returns that are higher, but that includes quite a lot of work on your part. If you look at passive investments, then I’d say that the 10% number when looking at the effort you have to put into the investment is rather reasonable.

Another issue, however, is the risks involved with investing. I heard more than one person say that with the lower rate the risk is no longer worth it. I’d actually be super interested to read any kind of actual risk analysis on this, because one thing that people seem to not keep in mind is that by reducing the interest rate the companies that offer it actually lessen the financial strain they place on themselves, making it less likely that they will fold in the future. So to some extent bringing the interests down actually also reduces the risk levels.

The third thing to keep in mind is the issue of supply and demand. Paying higher interest rates than strictly necessary is just bad business. It’s unlikely that any of the companies that have reduced the interest rates haven’t done serious analysis into the amount of money available on the market. In many countries people/investors are sitting on unprecedented amounts of money, meaning that there isn’t an issue of having enough supply. With other investments not offering similar returns with similar effort, enough people will gravitate towards P2P loans.

Will the rates drop further?

Seeing how some loans on the market in Mintos for example are already below 10% (and I know so are some Viventor loans), I’d actually dare say that there is still room for buyback rates to drop, because enough investors will appreciate the lack of default risk that they would have to carry otherwise. I don’t see the rates dropping much further, but clearly there is still enough money to go around.

Another thing that might influence the rates is also the inclusion of new investors. As buyback guaranteed loans get more and more attention more investors could enter the market driving the rates down even further. Those who remember what the market was like when Bondora bids worked by investors underbidding one another can easily imagine that driving rates to the ground is a rather viable option for those who earn returns more from the volume of their investments than the return rate.

There has been a significant amount of drama happening around Bondora this month.The new passive portfolio manager caused a fair bit of controversy and the API is still in testing so many investors have at least temporarily reduced investments. For me, the old PM is still active and can give out about 4K worth of loans, so I’m hoping that will tide me over until you can use the API to invest. This means that all the money I transferred into social lending this month went into Moneyzen and Estateguru. However, my Bondora portfolio is big enough that it just does its own thing even without adding in money.

Due to not adding much money into Bondora for the last couple of months, you can see the 60+ defaults becoming a more significant part of my portfolio. There are two reasons for this – firstly that the loans from the big growth months from last year are now defaulting, and the loan pieces that are defaulting at this point are starting to be the 15-25€ pieces as opposed to the 5€ pieces that used to default earlier. However, despite the continuously increasing defaults this was another record month for me in terms of interest earned:

Total interest earned for October ended up being 108,29€, meaning that this year is likely to end at 110€/month from Bondora, so I’m quite happy with the overall result already due to how much less I’ve invested into Bondora this year compared to what I had originally planned. Adding in Estateguru and Moneyzen, my P2P monthly earnings come just close to 125€.

I plan to add just a bit more money into Bondora this year to finish December with a total of 5K euros in deposits. My account will turn 3 years old in December and I guess I’ll have to write a longer overview into returns from Bondora and whether or not it’s been performing as I wished it to.

Another topic that’s starting to become more and more interesting as my portfolio ages is the recovery rate. I see pretty decent movement from recovery every month, and at this point I’m waiting for my monthly recovery to reach 20€/month. Should probably realistically happen mid-way through next spring. Recovery for last months looks like this:

Overall, I’d say, keep calm and wait for the API. I’ll probably be looking into it soon as well, once other third parties have made their solutions accessible. Overall, I was thinking about it a bit and I don’t even need anything super complex. I’d probably set my PM to just what I had now – AA, A, B &C loans OR any kind of Estonian loan. Not rocket science, so I’d assume that with the help of some friends working in IT it should be doable once more details about how the API works come apparent (like how exactly do the loans get distributed between bids!)